IRS Says Many Americans Can Expect Smaller Tax Refund in 2023

The Internal Revenue Service (IRS) building in Washington, on Feb. 19, 2014. Jim Watson/AFP/Getty Images

The Internal Revenue Service (IRS) has cautioned that many taxpayers should expect a smaller refund this tax season because of tax law changes including the expiration of pandemic-related stimulus payments that would otherwise have boosted refund balances.

“Due to tax law changes such as the elimination of the Advance Child Tax Credit and no Recovery Rebate Credit this year to claim pandemic-related stimulus payments, many taxpayers may find their refunds somewhat lower this year,” the IRS said in a press release on Jan. 23, the day the agency began tax returns for 2022 earnings.

While not all tax filers will see lower refunds as individual circumstances vary, many will see smaller checks.

Recovery Rebate Credit Ends

Millions of Americans received pandemic support in the form of Recovery Rebate Credit payments, for which people were eligible if they didn’t get their due full amounts via stimulus checks, formally known as Economic Impact Payments.

Three rounds of stimulus checks went out as advance payments, with missing amounts getting a top-up in the form of Recovery Rebate Credits in subsequent tax seasons.

Missing first- and second-round stimulus checks could only be claimed on a 2020 tax return.

Third-round stimulus checks were discontinued in December 2021 and missing amounts could only be claimed on a 2021 tax return filed in 2022.

Missing third-round amounts cannot be claimed on 2022 tax returns, which are to be filed by the April 18 tax deadline for most taxpayers.

People can apply for a six-month extension of time to file but this only extends the filing deadline while any taxes owed must be paid by April 18 to avoid late payment penalties.

Those who may have missed the opportunity to claim missing third-round stimulus payments can review their 2021 tax return and consider filing an amended return.

Child Tax Credit Changes

Another possible reason some tax filers will see lower returns this filing season relates to changes to the Child Tax Credit (CTC) program.

As part of the federal government’s pandemic relief effort, the CTC was expanded from $2,000 per child to $3,600 for each child under the age of 6 and to $3,000 for children between the ages of 6 and 17.

The American Rescue Plan also made the credit fully refundable, while sending half the credit to families in monthly installments for the second half of 2021. Families were eligible to claim the other half on their 2021 tax returns.

While there was a push by Democrat lawmakers and progressive advocates to extend the CTC enhancement, it failed to make it into the $1.7 trillion omnibus spending package.

This means that the CTC has been reduced for 2022 tax returns to $2,000 for each dependent child, regardless of age. The credit amount begins to phase out where adjusted gross income goes over $200,000 and $400,000 for joint filers.

The CTC is a dollar-for-dollar reduction in tax, meaning available CTC credit can only reduce one’s tax bill to zero while the unused portion cannot be provided as a refund.

However, some taxpayers may be eligible for an Additional Child Tax Credit (ACTC), which would allow them to receive up to $1,500 of the $2,000 CTC as a refund on their 2022 tax return this filing season.

People can fill out the worksheet included in the instructions for filling out Schedule 8812 (Form 1040) to determine if they’re eligible for the ACTC.

Child And Dependent Care Credit Reduced

A tax credit that working parents can use to help cover child care costs or that people with adult dependents can use for the same purpose is lower in 2022.

That’s because temporary enhancements to the credit for 2021, which both increased the amount of qualifying expenses and raised the percentage of qualifying expenses eligible for the credit, have not been renewed by Congress.

For tax year 2021, qualifying expenses were raised from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more. The percentage eligible for the credit was increased from 35 percent to 50 percent.

But for 2022, qualifying expenses have been reduced back down to $3,000 for one person and to $6,000 for two or more. And the percentage of qualified expenses that can be claimed now ranges from 20 percent to 35 percent.

The temporary enhancements also made the child and dependent care credit fully refundable.

But for 2022, it has become non-refundable, meaning that at best it can only reduce one’s tax bill to zero.

Charitable Deduction Break Runs Out

A temporary tax rule that let taxpayers deduct a portion of charitable cash contributions on 2021 tax returns even if they didn’t itemize the deductions has lapsed and was not renewed by Congress in 2022.

Normally, taxpayers can only deduct donations to charity if they itemize the deductions on a Schedule A (Form 1040).

But a special tax provision was enacted to allow individual taxpayers to claim a deduction of up to $300—and up to $600 for joint filers—even if they did not itemize and took a standard deduction.

That tax break only covered 2021 tax returns and is no longer in effect.

What’s New In 2023?

The IRS has made a number of changes for 2023 to account for soaring inflation, including higher federal income tax brackets and standard deductions.

For tax year 2023, the standard deduction for married couples filing jointly will increase to $27,700, a $1,800 increase from the previous year. Single taxpayers and married individuals who file separately will see a standard deduction of $13,850, an increase of $900 compared to last year. For heads of households, the standard deduction will be $20,800, a $1,400 increase from the previous tax year.

Marginal tax brackets have also been adjusted to avoid what’s known as “bracket creep,” which is when inflation pushes people into a higher tax bracket without a corresponding boost to spending power.

For tax year 2023, the top marginal tax rate for individuals remains at 37 percent for those with incomes above $578,125 and $693,750 for married couples filing jointly.

The other rates are 35 percent for individual incomes over $231,250 and over $462,500 for joint filers; 32 percent for individual incomes over $182,100 and over $364,200 for joint filers; 24 percent for individual incomes over $95,375 and over $190,750 for joint filers; 22 percent for incomes over $44,725 and over $89,450 for joint filers; and 12 percent for individual incomes over $11,000 and over $22,000 for joint filers.

The lowest rate is 10 percent for individuals with incomes of $11,000 or less and $22,000 for married couples filing jointly.

Also, the IRS will introduce higher contribution limits for 401(k) retirement plans for 2023 to help people save more for retirement and, in some cases, lower their income tax rates.